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Navigating The Complexity of Ownership From The Lens of Sanction By Extension

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Lapses in UBO Identification, Sanctions Compliance, and Corporate data

Tuesday, 30th April. 13:00 - 14:00 London Time (GMT+1)

HOST

Mark Bain

Speaker

Louie Vargas

Speaker

Michael Harris

PEP Screening

27 September, 2023

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Developing countries suffer a financial burden of $1.26 trillion annually, which drains their resources and impedes progress. These figures highlight the significance of proactive measures, including enhanced scrutiny and stringent regulations. It is essential to conduct PEP screening of individuals whose position puts them at higher risk of being involved in illicit practices. 

What is a PEP?

A Politically Exposed Person (PEP) is one who holds a central public position or is closely linked to such individuals. These positions usually involve a high level of authority, influence, or decision-making power within the state-owned enterprises or government. 

PEPs can include:

  • Heads of state
  • Senior military officers
  • Senior judiciary members
  • Senior government officials
  • Political parties’ leaders
  • Members of legislative bodies
  • immediate family members of PEPs, such as siblings, parents, spouses, and children
  • close associates, such as those who have personal or business ties to the PEP

What is PEP Screening?

Politically exposed persons’ screening is crucial to Know Your Customer (KYC) and Anti-Money Laundering (AML) processes. It checks individuals against PEP and sanction lists to detect potential risks. A thorough PEP and sanctions screening helps Financial Institutions (FIs) to proactively identify and mitigate the risk of fraud while ensuring adherence to regulatory requirements.

Let’s have an example to understand PEP screening better. Suppose a bank receives a loan application from someone who is a member of the country’s parliament. Thus, the bank would perform a PEP check before giving them the loan. This is to confirm that the individual has no links to organized criminals or is not involved in illicit financial practices.

Which Businesses Need to Do PEP List Screening?

Previously, only banks and financial firms were mandated to comply with AML regulations. However, a growing number of firms are required to fulfil AML requirements, such as:

  • Firms selling and buying property
  • Companies selling high-value goods, including art collectives or antiques 
  • Finance firms 
  • Online gaming and gambling companies

It is important to note that the type of business subject to AML regulations varies from country to country. The best way to confirm if your business needs to abide by AML regulations is to contact your country’s regulatory body. 

 

Implications of Not Performing PEP Checks?

Performing an AML PEP screening is legally binding, and failing to conduct it may cost your business in a number of ways, such as:

  • Substantial Fines: Failing to perform a thorough PEP screening can cost businesses heavy fines. For example, the Financial Conduct Authority (FCA) fined Financial Firm Gatehouse $1.8 million in 2022 for not performing adequate PEP and sanctions list screenings. 
  • Reputational Damage: Having your business’s name on any PEPs or sanctions list is bad for your reputation, as shareholders or customers may lose trust in your company.
  • Drop in Stock Share Price: AML scandals may cause a quick drop in the bank’s share price.

Who Does Audit the PEP Checks?

The PEP audits are done by local authorities, usually in charge of AML screening. For example:

  • Australia: PEP checks fall under the country’s AML and Counter-Terrorism Financing (CTF).
  • South Africa: The Financial Intelligence Centre (FIC) audits Politically Influential Persons (PIP), serving the same function as PEPs.
  • Singapore: The Monetary Authority of Singapore (MAS) defines politically exposed persons, including relatives. 
  • United Kingdom: The FCA and Joint Money Laundering Steering Group publish guidelines about PEPs and other KYC matters.

How to Perform a PEP Screening Process?

While regulators ensure your business performs corporate due diligence, no stringent regulations exist on conducting PEP screening. Below are three ways to suit your firm based on your scale and risk appetite.

1. Manual PEP Checks

The easiest way to perform a PEP screening is by manually looking at the right lists. Companies can do this by manually obtaining the details of PEPs available on official government sites, commercial databases, or public registers

2. Manual PEP Screening With an AML Solution

Another method is manually checking for names by entering them into an AML solution. This results in quicker searches by automatically aggregating results from several PEP lists. However, you still need to verify the data manually to ensure that you are checking the identity of the legitimate individual. 

3. Fully Automated PEP Screening

Companies subjected to AML regulations usually deploy fully automated PEP screening solutions. This involves integrating robust AML solutions either on-premise or through API. The AI-powered AML solutions work by aggregating information from multiple PEP lists and running it through different algorithms. Fully automated PEP screening helps companies verify that the clients are who they claim to be in real time. This helps mitigate the risk of financial fraud and avoid heavy fines while ensuring compliance with global AML regulations. 

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